Energy and the economy

Energy and the economy

The energy is such a necessity in the modern life and generates our civilization to move forward. Therefore, people usually tight the energy price with the expected future economic performance. This is very reasonable; however, I think it has been overdone.

The world crude oil price has a close relationship with the economic expected growth. Usually they are interacted, as the oil price generally moves in a similar direct with the world economic growth, and the oil shocks could lead to the economic shock in world wide. Crude oil is a key raw material in modern manufacturing and a key energy supply as well. It has a very key feature that allows itself to beat other types of energy, its efficiency. It is more efficiency than coal, or charcoal. Nuclear power may be more efficient than petrol, the unsafety of nuclear power has been feared by the most of the society. Such features give crude oil its unique position in the energy field and the oil industry dominates all other energy industries.

However, crude oil has not been very generous to our humans that it has very strong geographical bias. Some areas have very rich crude oil resources; but some do not. Therefore, crude oil is not supplied to meet the necessary need but for profits. Nothing is really made to meet the need. However, crude oil is a relatively more extreme and crucial case. It has already become something that is required by almost all parts of the society that all parties compete with each other in order to have more consumption of it. When no party is willing to give up its demand, the supply becomes very powerful especially the supply side is very limited and controlled by much fewer parties. Therefore, the demander in the oil market is basically the general economy but the supply is very restricted and limited.

Both the demand and supply of the oil market could be manipulated and are very likely to be influenced by the global political environment. Thus the market becomes extremely complicated that more parties involves, more uncertainty will be raised.

How great should the economic data influence the market?

Why do the economic data influence the market? Because the economic data release can change people’s expectation about the future. Though individual market prices have already included people’s expectations about individual fields, the economic data change people’s expectation about how the great economy may affect the market, in other words the influence from other fields on the individual fields people care about. Before the economic data release, people may have close to perfect information about the individual fields they pay attention to but they lack information about other fields. When the economic data release, people have to reconsider the effects from other sectors. Therefore, the degree of the economic data influence depends on how much people lack information about other fields. In a more mature market, the influence of the economic data should be smaller than that in a less mature market.

What could happen to dividend yields?

Currently the returns of government bonds decrease and almost approach the negative zone and banks are ready to charge negative rates on deposits and some banks actually have already taken action. In addition, the new raised equity significantly dropped last half of this year. When the uncertainty overwhelms the market, the investment on risky assets becomes unpopular. When investors reduce their investment on equities, which are usually considered to be more risky compared with low yield bonds, some firms may face equity contraction. The contraction of equity may lead firms to financial difficulties as banks like to lend money to firms with large equities. In order to maintain their capitalisation levels, many firms may choose to increase dividend yields to keep their investors and maintain their equity prices. Of couse, increasing dividend yields could make themselves more attractive; however, such action could increase the financial difficulties and some investors may concern their abilities of paying dividends or supporting future growth. Therefore, not all companies can increase their dividend yields, only those big ones are able to do so. The smaller companies may even reduce their dividend yields as they have to maintain rapid growth trends to attract investors; otherwise, they will be forced out of the competition due to the increasing financial pressure.

Is the national pension scheme really “benevolent”?

The national pension scheme is provided as a social safety net, especially for the elder population. This is the original idea and the national pension scheme is often funded by individual contributions and government expenditure. In many countries, the national pension scheme dominates private pension schemes, which means the issue of the national pension scheme can become a national issue. As the national pension fund is enormous, especially when the national pension scheme is absolutely dominating, the national pension fund becomes extremely powerful and influential in the financial market, giving the example of the Japanese national pension fund, the largest fund in the world. As the pension scheme is national, the government has a lot of control on the fund. As the pension fund is so influential, the government uses it as an additional government budget, especially when they believe they can use the pension fund to boost the economy thus create a higher return for the pension fund in the future. Such belief is reasonable, but as the consequence is not necessarily immediate, the possibility of the consequence of failure is often ignored. Moreover, in some governments, some politicians could be forced to take short-sighted actions due to the election pressure. Therefore, sometimes the national pension fund is used in other purposes, which are more risky and dangerous. Such behavior could worsen the fortunate of the pension fund. The expansionary fiscal policy has to entirely use the government budget, other than other sources including the national pension fund; otherwise, the risk of the expansionary fiscal policy is too high.

Are we entering an "Ice Age"?

The Bank of England's new bond-buying program got into trouble as pension funds and insurance companies refused to sell gilts to the central bank. The price of gilts will continue to rise even more rapidly when the Bank of England continues the program. Then the era of negative rate will eventually and inevitably come. It could be a disaster because entering the era of negative rate means we expect the future will be worse than the present and the general behaviour will become extremely risk averse. When we start to expect the future is worse than the present, we are very likely to experience a high inflation. Moreover, the investment strategy will freeze the economic growth. The phrase I use here "Ice Age" means people are too afraid of the uncertain future and refuse to invest in the future, then the economic growth could be frozen.

What can avoid labour strike?

Labor strike could be damaging to the economy and cause inconvenience to ordinary people.  What causes labor strike? Of course, the most direct cause is poor payment and working conditions. However, there are some fields, which do not have frequent labor strike, but still suffer poor payment and poor working conditions. Why? Because of the competition. Labor strike is much more likely to happen in an oligopoly industry than in a competitive industry. In a competitive industry, labor strike risks their company's fate and when a labor strike happens, labors are very likely to lose their jobs as their company will lose the competition.

Does the modern technology make the small businesses’ lives easier?

Many people believe that the modern era has built a great opportunity for the small businesses. As we can see that the costs of advertisement and start opening shops have reduced to a great extent. The Internet allows people to shop in virtual shops (online stores), the cost of opening one virtual shop is extremely low and sometimes is completely free. For a small business or a new entrepreneur, it has become a lot easier to sell their products. Moreover, the social media also helps small businesses to advertise themselves. Access to social media is free, this provides small businesses with an opportunity of free advertising. Therefore, many people see that the cost of start up a business is lower and the cost of advertising could be close to zero and come out a conclusion that small businesses are easier to growth.

However, this is not the full image of the story. The modern technology also makes the big businesses stronger as well. The modern technology does not include the Internet; it also includes other innovations. Let’s talk about the use of the Internet in big businesses. The big businesses also can set up their online shops just like what many small businesses do. The advantage they have is extremely important that they do not need to worry too much about the trust issue. The brands of the big businesses reduce the customers’ concerns about their credibility which put themselves in a stronger position when customers make their choices. Moreover, the current search engines are more friendly to the big businesses that the big businesses are searched more often than the small businesses so they are always above the small businesses on the search lists. Therefore, when people search a product which is produced by a large firm as well as several small firms, due to the rank of the search list the large firm is more favored by people. This can create a loop that strengthen the big businesses, that more people search big businesses, then more people consume from the big businesses, then the big businesses maintain at the top of the search lists, so the big businesses are searched by more people. Moreover, the rich resources of big businesses allow the big businesses to advertise almost everywhere online. This cannot happen to the small businesses. In addition, small businesses traditionally have one advantage that they can establish a good relationship with the locals; however, the Internet changes the shopping habit that establishing a good relationship becomes less important, or at least it makes big businesses easier to establish good relationship with their customers by employing professional online service teams.

Besides the use of the Internet, large businesses employ other  modern innovations to boost their productivities and such rich resources  are not available to small businesses or new established businesses.